The Brexit crisis has kept the global financial markets on tenterhooks for the last 4 years. The continuous failure to reach a consensus in parliament, extensions of the deadline, political instabilities and the unknown after-effects on the capital markets on both sides of the channel have impacted every aspect of the economy, right from investment decisions to visa applications and GDP growth rates.
Did you know? Over 3.3 million EU citizens living in the UK, especially 50,893 workers and 120,000 job seekers, will be severely affected post-Brexit. Over 15% of UK university professors are from the EU, who might have to go back to their respective countries.
Boris Johnson is back in the Driver’s Seat. Is it the End of Policy Paralysis?
On December 12, 2019, the UK went to general elections. The result saw the Conservatives, led by Boris Johnson, secure a thumping victory. This puts Brexit negotiations firmly back on track again. A clear majority for the Conservatives means there might no longer be a risk of a hung parliament. Boris Johnson had been facing tough opposition in parliament, since he headed a minority government. Now, the Brexit plan that he negotiated with the EU will have wider support.
It also dashes all hopes of a second referendum. Mr. Johnson is free to stop relying on lawmakers of Northern Ireland, who were also against his Brexit plan. In short, he will have more power to get his own way on Brexit.
This is good news for the financial markets. Policy uncertainty increases risk and cost of capital. It also correlates strongly with the macroeconomic environment, business conditions and other economic variables that affect investment. The Conservative Party, with its strong focus on business and capitalism, might be perceived as good for the financial markets. In fact, Bitcoin longs reached an all-time high just before the UK elections, signalling extreme optimism prevalent among crypto investors.
But Brexit negotiations, over the years, have already taken a toll on the UK economy. Even with a deal in place, the impact could be severe.
The UK recorded its slowest growth since 2010 in Q3 2019, at 0.3%. European trade and manufacturing activity have weakened on account of Brexit and the souring US-Sino trade relations. Global economic growth is forecasted by the IMF at just 3.5% for 2020, against a backdrop of falling investment and consumer demand across developed and emerging economies.
Ungoverned Digital Currencies to the Rescue
Cryptocurrencies, which are not governed by any centralised authority, could provide some stability and value to investors during times of crisis in the fiat world. A recent study by market intelligence firm, Cindicator, reveals that 62% of financial analysts think that Brexit would lead to higher crypto prices. Uncertainty in major financial markets could make cryptos attractive investment alternatives.
Did you know? Bitcoin has proven to be a worthy investment asset during political crisis in recent times. Peer to peer trading volumes of BTC increased sharply in unstable countries like Venezuela and Argentina in early 2019. People preferred to hold BTC over the Argentinian Peso and Venezuelan Bolivares, leading to Bitcoin breaking the $10,000 resistance level.
Could Bitcoin Become Gold 2.0?
Historically, during periods of market chaos, investors move towards safe haven assets like gold and oil. Gold is precious and is a real store of value. In recent years, Bitcoin (BTC) has also benefitted from such geo-political crises. There has been a 284% increase in BTC trading between May 19, 2019 and August 19, 2019, as compared to March 22 and June 22, 2018.
These periods are associated with key developments in the US-China trade talks. Bitcoin shares some characteristics with gold, as an asset that has finite supply, is decentralised and unaffected by inflation. Moreover, it has lower storage costs, which is where it scores over gold. According to Bloomberg data, gold price correlation with BTC had increased during May to August 2019.
Now, with the Brexit deadline extended (again!) to January 31, 2020, the question is: Could BTC replicate its meteoric rise of December 2017?
Bitcoin briefly touched the $20,000 mark in December 16, 2017, after which it was a steady climb downhill. In 2020, it regained its momentum with increased trading activities owing to a global economic slowdown, touching the $12,000 mark in June 2019. A sudden rise in trading volume and price level can be seen just days ahead of the previous Brexit deadline of October 31, 2019. On October 28, 2019, BTC was trading at $9,656, while on October 25, 2019, it traded at $7,493.
Did you know? Fundstrat Global Advisors conducted a survey in 2018, where 72% institutional investors said that cryptocurrency prices would rise during global financial recession. Bitcoin itself was an idea based on the shortcomings of the global banking system. After the 2008 recession, Satoshi Nakamoto wanted to create a digital financial system, which wouldn’t be at the mercy of the global central banks.
A Strong Case for Blockchain-Based Payment Methods
Even with a deal, the socio-economic impacts of Brexit are likely to be manifold. Low wages, unemployment growth and changes in immigration laws could hound sentiment. Moreover, money transfers within the fiat system are likely to become complicated. Despite the UK being a member of the EU, it never adopted the single currency system. Britain’s divorce from the EU will make international money transfers expensive. Here, cryptocurrencies could provide solutions for easy cross-border remittance. When it comes to cross-border payment networks based on blockchain, Ripple (XRP) is the industry leader. It also has a strong and constantly expanding user-base in the global banking industry. Industry experts believe that XRP price could rise on account of Brexit.
Crypto banking start-ups and mobile exchange services could become a viable alternative to traditional financial systems.
Brexit will not only create intense volatility in two major fiat currencies, experts say it could lead to an identity crisis for the global financial system. The EU and UK are hugely invested in each other’s blockchain innovation industries. The UK is one of 22 countries that have joined the EU’s blockchain partnership, with an aim to create a Digital Single Market. Now, it remains to be seen how these countries form their regulatory frameworks post-Brexit.
The UK has been forming alliances with other nations, such as Russia, Canada and South Africa, to retain access to EU’s $6 billion fintech industry. Both the UK and the EU are likely to remain dedicated to the cause of blockchain innovation, especially given its rising popularity amidst economic chaos. Conservatives especially could find a strong case for increased blockchain investments, to make the UK economy competitive in the global scenario.
The overall picture looks bullish for cryptocurrencies. With major central banks committed to a dovish monetary stance, the safe haven status of BTC and other cryptos remain cemented for 2020.
The Conservatives won the elections but maybe it is time to be less conservative with cryptos. Tell us what you think. Connect with us on Twitter, at @DSX_uk. Don’t forget to check out the exchange that is totally non-conservative in its services! Register with DSX today.